US Dollar drifts higher above 99.00 on Middle East conflict
- US Dollar Index edges higher to around 99.35 in Thursday’s Asian session.
- The US-Israel war on Iran boosts the US Dollar, a safe-haven currency.
- The US CPI inflation met expectations in February.
The US Dollar Index (DXY), an index of the value of the US Dollar (USD) measured against a basket of six world currencies, currently trades near 99.35 during the Asian trading hours on Thursday. The DXY edges higher amid further escalation in the Middle East conflict. The US weekly Initial Jobless Claims report will be published later on Thursday.
Traders will closely monitor the trouble in and around the Strait of Hormuz. Iran has launched its “most intense operation since the beginning of the war, stepping up its efforts to halt traffic through the critical oil conduit. Meanwhile, Bahrain said early Thursday that Iran has targeted fuel tanks at one of its facilities, while a senior Iraqi port official said two foreign tankers had been hit in its waters, catching fire and leaking oil. Ongoing geopolitical tensions in the Middle East continue to boost the US Dollar against its rivals in the near term.
The US Consumer Price Index (CPI) rose 0.3% MoM in February versus 0.2% prior, according to the Bureau of Labor Statistics on Wednesday. This figure came in line with expectations. The core CPI, excluding volatile food and energy prices, increased 0.2% MoM in February, compared to 0.3% in the previous reading, also in line with the estimates.
The annual CPI inflation rates were unchanged from January, indicating that inflation was holding above the Federal Reserve’s (Fed) 2% target but not getting worse. Markets are now pricing in nearly a 99.5% chance that the Fed will leave the interest rate unchanged at its March policy meeting, according to the CME FedWatch tool.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
Author
Lallalit Srijandorn
FXStreet
Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.
